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Jeff Nielson is the writer/editor of Bullion Bulls Canada. He came to the precious metals sector as an investor in the middle of last decade, and quickly decided this was where he wanted to focus his career. Jeff's background includes four years of Economics at the University of British Columbia, before he went on to earn his law degree from that same institution.

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Western ‘Pension Crisis’ Reflects Investment Incompetence

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Originally appeared at BullionBullsCanada.com.

A Reuters article published today tells us that (once again) dangerously under-funded Western pension funds are lurching toward a “crisis”. In some respects, a pension crisis in the corrupt, debt-bloated economies of the Western industrialized world was inevitable. The massive accumulation of debt is a large and relentless “drag” on the economies of these nations – guaranteeing lower rates of return over the long run for most asset classes. This is coupled with the massive “pension overhang” of the spendthrift baby-boomers, who not only buried our nations in debt, but then squandered most of their own wealth in mindless consumption.

Proving, however, that you can always “make a bad situation worse”, the administrators of pension funds have also mirrored the incompetence of most mainstream financial advisors – who have gone from being architects of “wealth creation” to the implements of “wealth destruction”.

The proof of the utter incompetence of almost all these suit-stuffers is abundant, and it starts with the Golden Rule of investing: “buy low and sell high”. What do we see virtually all mainstream financial advisors and pension fund administrators doing today? They are selling equities (which have been plunging in value), and (so we have been told) are paying the highest prices in history to buy U.S. Treasuries.

In other words, all of these investment “experts” are doing precisely the opposite of what they should do if they want to make money (for their clients/beneficiaries): they are selling low and buying high. Of course “buying high” is an enormous understatement – given that the “value” of any/all U.S. Treasuries is zero (or close to it). Again, this is something which can be demonstrated in various ways.

Former Reagan economic advisor, Professor Lawrence Kotlikoff states unequivocally that the “correct” figure for U.S. indebtedness is not the $14+ trillion fantasy-number universally referred to as the “U.S. national debt”. Rather, the correct figure should be $211 trillion, he argues.

There is nothing surprising here. It is common knowledge that the U.S. government is hiding countless $trillions in “unfunded entitlements”. All that is “debatable” is the precise time frame over which we want to count those liabilities. Ultimately, the precise number is moot – as even the lowest possible estimate of the cost of those entitlements is utterly beyond the financial capabilities of the U.S. government (by at least a factor of ten).

At the same time that we see simple arithmetic showing that U.S. “unfunded entitlements” could never be “funded”, we have also observed the political reality in the U.S.: that the corrupt, two-party dictatorship is utterly incapable of making any significant cuts in these entitlements. In the recent game of “chicken” which Republicans and Democrats played as part of their farcical “debt-ceiling crisis”, both parties showed themselves ready-and-willing to literally “blow up” the U.S. economy rather than making even a slight change in their perennial, ideological gridlock.

The political stalemate in the U.S. is as pathetically comical as it is obvious. Despite the fact that the U.S. is undergoing the most extreme “revenue crisis” in its entire history, Republican ideologues are adamantly opposed to restoring revenues to previous levels (i.e. tax increases). Meanwhile, Democrat ideologues are equally intransigent in opposing cuts to these hopelessly unrealistic entitlements. Note that part of the reason why these entitlements are “hopelessly unrealistic” is because both parties have combined to loot approximately $10 trillion from various government “trust funds” – and have plundered roughly $5 trillion out of the Social Security “trust fund” alone.

It is mathematically impossible for the U.S. to pay its bills and it is politically impossible for it to significantly reduce  its spending; and with the baby-boomers now retiring, those unfundable entitlements must now be funded. The result of this dynamic is plain for all to see: imminent bankruptcy. Put another way, none of the chumps paying the highest prices in history for U.S. 10-year Treasuries will ever see these worthless coupons “mature”.

Of course, there is a second, equally irrefutable means of demonstrating that U.S. Treasuries are worthless: they are denominated in U.S. dollars. The U.S. dollar is completely and obviously worthless (and the euro is little different). This automatically makes any/every debt instrument denominated in U.S. dollars equally worthless. Again, this is more simple arithmetic.

The U.S. dollar is handed to U.S. big-banks at zero cost (i.e. 0% interest). As we have seen with wave after wave of B.S. Bernanke’s “quantitative easing” (i.e. reckless money-printing), they are available in infinite supply. It is an economic tautology that any good/item which is available at zero cost, and in infinite supply has a value of zero.

Naturally, most U.S. dollar-holders are utterly incapable of recognizing this simple arithmetic. Four hundred years ago, during “Tulip Mania”, the Dutch people were convinced that tulips were the most precious and valuable items in the world. In fact, they were paying the absolute highest prices for those tulips in the weeks and months prior to that “bubble” bursting, and tulips becoming worthless.

The clueless buffoons running these Western pension funds will whine that they have “no choice” other than paying the highest prices in history for worthless paper. “Equities are too dangerous!” they meekly chirp. And here we come to the crux of the problem: as it turns out, all of the “experts” administering these pension funds don’t even think for themselves – but rather allow other “experts” to tell them what they should think.

Who are these other “experts”? In a nutshell, bankers. What have these banker-experts been “recommending” to the other experts who administer our pension funds? Sometimes they recommend that these chumps should buy shares in each other’s bank, but mostly they recommend all of their wonderful “new financial products”.

It boils down to the following scenario. The administrators of pension funds have a professional duty to invest every dollar under their management in a sober and conservative manner, since they are literally playing with the futures of millions of people. These sober, conservative administrators have been getting most of their “financial advice” from the most rapacious financial predators ever hatched on this planet.

Now these same administrators are bailing-out of these investments (with large losses), in order to buy totally worthless debt instruments from the greatest deadbeat the world has ever seen??? Simply, these “experts” have a predilection for financial suicide which would make even the most reckless lemming cringe in horror.

Of course, in the Corrupt States of America, this propensity for financial suicide is not “left to chance”. Instead, armies of Wall Street bag-men tell these administrators what to buy (in return for lucrative bribes). This is a scandal which already literally stretches from coast to coast. Yet there has been absolutely no move nationally (by either Republicans or Democrats) to “drain the swamp” by simply banning all of these pension fund bag-men from soliciting these administrators into buying fraudulent financial instruments.

Even more incredibly, while we have seen a handful of U.S. pension fund administrators receive prison sentences for taking bribes, we haven’t seen any of the bankers (or their henchmen) convicted for giving those bribes. How does that work?

It would seem that the legal “duty” which these pension fund administrators owe to beneficiaries to prudently manage these assets implies a duty to think for themselves. These people are not mere “clerks”, but are very highly paid financial planners themselves. If they want to collect their fat pay-cheques they should take responsibility for their own decisions. At the very least, these highly-paid administrators should cease in getting their advice from the most intellectually- and morally-bankrupt shills in the marketplace.

Even for those who don’t subscribe to the belief that all of this fraud these and economic woes were the deliberate goal of the banksters, the following facts are unequivocal. These are the same individuals who (supposedly) “failed to see” the economic collapse which they were 100% responsible for causing. In the three years since, they have now demonstrated themselves to be utterly incapable of fixing any of the problems they have created. This might have something to do with the fact that any/every “solution” proposed by these financial charlatans involves nothing other than pouring more gasoline onto the fire.

What should all of these pension-fund administrators be doing with the assets which they have a duty to manage prudently, while at the same time achieving an adequate long-term return? In the sequel to this commentary, I will prescribe a common sense solution for restoring at least some level of solvency/reliability to our pension systems.

There Are 3 Responses So Far. »

  1. You will know that some pension managers are regaining their senses when they notice that the PM miners go to work, and dig up fresh product to sell and make lots of money with increasing earnings as demand goes up–and start buying the gold stocks in a panic to get some yield…

    When the “owners” of paper gold wise up and ask for delivery and get told take dollars or wait months or probably hear “No Mas” from the etf’s, or bullion banks that have long leased that gold 30-40 times over the gig will be up.

    Gold derivatives will crash, bonds will become toilet paper, Stocks??…and the barbarous relic will prove what it has always been–the currency of last resort…

  2. Yes Pat, SOME managers ARE starting to “wake up and smell the coffee”. In fact, I pointed out one such example in the sequel (which should appear here in a few hours).

    Unfortunately I didn’t really have the space to get into the gold and silver miners – since there is a LOT to say there.

    Bottom-line: those wanting to profit on the profits of the PRODUCERS of these precious metals need to focus on acquiring a “basket” of the “junior miners”, and NOT the large-caps which get most of the media attention.

    It’s the sub-$1 billion market-caps where the VAST majority of growth and profitability is occurring.

  3. Write more, thats all I have to say. It appears that you relied on some
    good sources to make your point. You clearly know what you’re talking about.

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